Microsoft: Time to Change

What are the economic rules of the road for a high-tech monopolist? That is the key policy question for Microsoft Corp. and Washington following the ruling of the U.S. Court of Appeals that overturns District Judge Thomas P. Jackson's decision to split Microsoft in two. The court severely reprimanded Judge Jackson for criticizing Microsoft in public and failing to hold a hearing on the breakup proposal. But it unanimously supported Jackson's finding of fact that the Windows operating system holds a monopoly in the PC market and that Microsoft used its market clout to maintain that monopoly, thus violating the Sherman Anti-trust Act. We have some advice Microsoft would be wise to take. If it doesn't, it could find itself enmeshed in court actions for years, perhaps with a single judge overseeing every proposed change to its software.

Microsoft's core strategy has been to bundle new features into Windows, using its monopoly power to push into new markets. Consumers love the convenience of a standardized operating system that comes with applications. Rivals complain they get unfairly frozen out. Now that two courts have concluded that Microsoft is behaving in a monopolist way, it has to change. It should be allowed to continue to bundle with abandon, but the courts should insist that Windows is a common carrier that must be open to all competitors, much like phone lines and cable.

One way to do this would be for the courts to make sure PC makers can configure software on their hard drives, giving consumers all kinds of application choices. Microsoft should be precluded from designing its operating system so that competing products are harder to use (it should take the same number of mouse clicks, for example, to use rival media players) or run less effectively (other companies' speech-recognition software should run just as smoothly as Microsoft's). The courts should also ensure that Windows becomes as good a platform for other companies as for Microsoft. And for the day when most software is running on the Net, the courts must make sure that common links let rival software fit smoothly with Windows.

Microsoft also must be precluded from using contracts to squeeze out rivals. It has a long history of negotiating exclusive deals with computer makers that put its own Web browser, not rival Netscape Navigator, on desktops. Just recently, it tried to get AOL Time Warner Inc. to drop its ties with RealNetworks Inc. and instead use Microsoft's Windows Media Player as a condition for featuring AOL's products and services on Windows XP, Microsoft's much-anticipated new operating system. AOL had the clout to turn Microsoft down.

Microsoft must accept the legal finding that it is a monopoly. As such, it has an obligation to open its operating system to competitors. If it does, it should be able to do the very thing it says is essential to its future--bundle new features into Windows that consumers want.

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